Administration September 4, 2019

More Employers Focusing on Lifetime Income

However, most are offering systematic withdrawals, lifetime education and planning tools, and in-plan managed account services; they are still leery of offering guaranteed income solutions such as annuities.

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More employers are adopting lifetime income solutions, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson.

Thirty percent of employers say have adopted one or more lifetime income solutions in this year’s survey, up from 23% in 2016. Additionally, 60% say they would consider offering their employees lifetime income solutions in the future.

“Employer concern about their employees being financially ready for retirement has never been greater,” says Dana Hildebrant, director of investments at Willis Towers Watson. “And while many employers are making headway to help workers save more, their efforts to transform individual savings into a consistent flow of income that will last a lifetime remain a work in progress. The increased adoption of lifetime income solutions is an exciting step in the right direction.”

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Asked why they are adopting lifetime income solutions, 74% said it is because they are concerned about an aging workforce and increasing longevity, up from 45% in 2016. Seventy-four percent said it is due to their focus on retirement readiness, and 46% said it is due to the shift from defined benefit (DB) to defined contribution (DC) plans.

Among those that offer a lifetime income solution, the most common is systematic withdrawals (80%), followed by lifetime education and planning tools (70%) and in-plan managed account services (44%). Only 17% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component. Fifteen percent support out-of-plan annuities, and 15% offer in-plan deferred annuity investment options.

“While it is encouraging more employers are embracing various lifetime income solutions, it’s disappointing relatively few have adopted what the industry sees as more effective income-generating solutions, such as annuities and other insurance-backed products,” Hildebrant adds. “However, employer interest in these options may pick up steam as they better understand the value and associated benefits.”

The survey also found 41% of employers that are currently offering a lifetime income solution are considering an in-plan asset allocation option with a guaranteed minimum withdrawal to be implemented in 2021 or later, 31% are considering an in-plan annuity option, and 23% are considering an out-of-plan annuity.

Willis Towers Watson, in “Lifetime Income Solutions: Progress, With Work Ahead,” says that perhaps the most practical approach to offering workers annuities is to embed them in target-date funds or balanced funds. Today, 4% of survey respondents offer such a solution.

Asked why they do not offer insurance-backed solutions, 75% of employers say they are too complex for them and their recordkeepers to administer. Sixty-one percent said fees are too high, 60% said the products themselves are too complex, 58% said they fear there may be restrictions in portability for departing employees, 55% said they are not transparent, and 52% said workers just are not demanding these options.

“Policymaking is uncertain at this time, but the wheels appear to be in motion for more regulatory support for all stakeholders as it relates to lifetime income,” Willis Towers Watson says in its report. Seventy-seven percent of sponsors want a specific safe harbor that lessens the burden of overseeing an annuity provider. Fifty-seven percent of sponsors are waiting to see if other sponsors adopting lifetime income solutions, 52% want a wider range of guaranteed products, and 33% want to see investment-only products.

Willis Tower Watson’s findings are based on a survey of 164 companies conducted in May and June.

Investing September 4, 2019

Retirement Investors Should Take a Look at International Equities

“For investors with long-term time horizons, international equity markets offer diversification and present a meaningful opportunity," says Nigel Bliss, with Mondrian Investment Partners.

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During this period of heightened market volatility, active asset managers are marketing international and global equity strategies to institutional investors based on valuations and the value they could add to their portfolios, particularly in emerging markets and small-cap equities, says Alexi Maravel, director of institutional research for Cerulli Associates.

“With the volatility in the markets, there is a feeling that a lot of institutions have had a lot of exposure to U.S. equities for a long time and have benefited from that, just on a valuation basis,” Maravel says. “But international and emerging markets are undervalued relative to U.S. equity markets, so a lot of the institutional investors we talk to are reassessing their U.S. allocations.” Retirement plan investors should do the same, he says.

A survey that Cerulli sent to asset managers last month asked them where they expect to receive requests for proposals (RFPs) in the next 12 months. “The top strategy they expect to receive RFPs for is multi asset class solutions,” Maravel says. “The fifth highest was international and global equities. We are seeing a subtle shift of institutional investors moving their assets.”

Nigel Bliss, senior portfolio manager with Mondrian Investment Partners agrees that international investing is taking hold: “For investors with long-term time horizons, international equity markets offer diversification and present a meaningful opportunity, given the near decade-long outperformance of U.S. equities over international and the material overvaluation of the U.S. dollar relative to most market developed market currencies.”

Susan Czochara, practice lead, retirement solutions, at Northern Trust Asset Management, says her firm views “international investing in the context of retirement investors as a strategic move. We want to keep that long-term strategic focus broadly diversified in investments, including international. Risk and risk control are essential in down markets. Our research shows that a strategic portfolio that includes international will, over time, have a better risk-adjusted return. We think of it more from a strategic standpoint, especially as it relates to retirement investors.”

As to whether investors should seek out actively managed or passively managed international investments, Maravel says institutional investors are seeking out passive investors when the risk/return is low, that is “where it is easy to do passive replications. As you get further out on the risk spectrum into emerging or frontier markets, or small cap, you see less passive and the search for best-of-breed active managers.”

Northern Trust Asset Management views the active/passive debate slightly differently. “Our belief is that the debate around passive versus active presents a false dilemma,” Czochara says. “The best features of both can be found in factor-based investing. It is rules based and transparent, both of which you would find in a typical passive style, plus it offers a potential increase in returns over the index. That is what we believe is a great approach to use for both non-U.S. and U.S. exposure. As a pioneer in factor-based investing for nearly 30 years, we have seen how it provides excess returns.”

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